Liquidity Risk
The risk you cannot exit at a fair price when you need to.
What is Liquidity Risk?
Applies to thinly traded securities, private funds with lockups, and real assets. It tends to arrive at the same moment as market stress, when everyone wants out at once.
Liquidity Risk: a worked example
A non-traded REIT gates redemptions during a downturn, trapping investors.
More terms in Risk & Return
Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
Beta
How much a security moves relative to the overall market.
Alpha
Return above what the portfolio's risk exposure would predict.
Standard Deviation
How widely returns disperse around their average.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.